Sam Altman was removed as CEO of artificial intelligence research firm OpenAI over the weekend. The surprise ousting of Altman — who co-founded OpenAI — has prompted unnamed investors to explore legal options against the company's board, according to a Reuters report. However, OpenAI's hybrid corporate structure poses challenges to lawsuits. The firm has a non-profit arm that funds its for-profit operating entity. This setup provides substantial legal liability protections.
Yahoo Finance Legal Reporter Alexis Keenan breaks down the details of OpenAI's unique corporate structure, providing insights into the limited avenues investors have to take legal action against OpenAI's leadership shakeup.
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Video Transcript
RACHELLE AKUFFO: The abrupt ousting of OpenAI's co-founder and CEO Sam Altman took the tech world by storm sparking a possible mass exodus of loyal employees. The artificial intelligence startup now faces possible legal perils though. With more on the potential fallout, we're joined by Yahoo finance's Alexis Keenan. Alexis, break down what's at stake here and some of the potential hurdles ahead.
ALEXIS KEENAN: Yeah, so it's Reuters that's reporting that there are a group of investors who are, quote, "studying their legal options against the board of OpenAI" and that's over concerns that they could lose the 100 of millions of dollars that they've poured into the company, but who these investors are, we're not really sure. We know that in the for profit entity, you have Microsoft with a 49% stake, you have other investors as well as the company's employees with another 49% stake as well as the non for profit that holds a 2% share.
Now what form these suits would take is a question, somewhat of a legal mess, and that's because of the very unusual corporate structure that OpenAI has. Take a look. Its parent company, it is a not for profit and that non-for profit, it controls the company's for profit LLC and that was raised back in 2019 in order to raise capital for the company.
Now with a non-for profit, it becomes a little bit more difficult to argue that the board breached its fiduciary duties. If you think about it, a non-profit right, it does not have an obligation to maximize profits, so it's a little bit of an unusual argument there. However, legal experts say that the board does in fact have fiduciary duties, duties of care, duties of loyalty both in terms of the not for profit company as well as the for profit LLC.
You want to take a look too, the non-profit entity on its website, OpenAI, has long warned investors that its mission is clear, and they say it's wise for any investor to view their investment in the spirit of a donation. But these legal experts say look, you can't just waste company assets. There's this caveat for LLCs that say some states do allow waiving of some of these duties, but to really add to this legal quagmire, this legal mess, it's not just investors that might have a potential legal action, you also have the employees in the company.
They were anticipating a tender offer set to close, I believe, next month that was valued at approximately $86 billion. You also have the public. You have state attorneys general who would have the right to bring potentially a suit on behalf of the public. You also have Altman himself. You also have president and former board chair Greg Brockman, they may have grounds for-- to sue for their ousting.
So there are a lot of unclear potential legal avenues, explains a lot why it is cast as studying right now that the lawyers are at the table trying to figure out which entity could potentially face action and which parties could even bring suit. So a lot to unpack here, and we'll continue to watch as these issues develop, guys.
AKIKO FUJITA: Yeah. Alexis, it's pretty incredible when you think about how quickly this has all imploded. I mean, it was just six months ago we were talking about OpenAI being really the leader in this space. I'm curious, on the investor part of it, as you pointed out, a number of VCs obviously potentially suing because of the loss in value, is there any precedent that you can point to? Any examples recent examples of something similar that's happened with a private company like this?
ALEXIS KEENAN: Yeah, so that's one thing I've been asking these legal experts and the way I've phrased it though is to say, look, has any company been able to put this non-profit parent on top of a for profit entity, and therefore insulate themselves from liabilities? And they say no, that this is highly unusual and at the end of the day, they don't think that there will be able to be a full insulation of liability by taking that structure.
It's just a very unusual position to take for these companies, but we know why OpenAI did it back in 2019, and that was so that it could get that outside funding to catapult it into the next chapter of their development. So no, it's very unusual, and I will keep searching but so far have not seen an analog for this particular case.
AKIKO FUJITA: OK. We'll be looking out for any reporting on that front. Alexis Keenan, thanks so much for that.
